Banking & Finance

National lottery

CSRC lifts ban, but changes IPO funding rules

China International Capital Corp Chairman Ding Xuedong smiles before hitting a gong during the debut of CICC at the Hong Kong Stock Exchanges in Hong Kong

CICC’s chairman Ding Xuedong

Formed 20 years ago as a joint venture between Morgan Stanley and China Construction Bank, China International Capital Corp (CICC) was once the lynchpin of Chinese investment banking, winning mandates to sponsor most of the blockbuster listings of Chinese companies overseas.

More recently it has been suggested that CICC’s rainmaker clout is on the wane (see WiC301) as major privatisations of state enterprises have dried up. Nevertheless the investment bank has proven that it is an old hand at picking the best time for an initial public offering.

In this case it’s CICC’s own IPO that is making headlines. The company successfully went public on Hong Kong’s stock exchange on Monday (albeit after cutting its fundraising size by a fifth). The trading debut coincided with an upturn in the shares of Chinese brokerages, thanks to a China Securities Regulatory Commission (CSRC) announcement on Friday that IPOs in the A-share market will resume after a four-month hiatus. Buoyed by the timely news, shares of CICC closed their opening session 7.4% higher than the offering price.

The lifting of the ban will replenish a key revenue stream for CICC. The CSRC said 10 companies have been approved to go public – and the first new IPO possible may only be a fortnight away. Another 18 offerings are likely to be launched before the end of 2015.

The government has imposed at least nine moratoriums on the primary market since 1994. The latest suspension came in July in the wake of the extreme market volatility in Shanghai and Shenzhen. Investor confidence now seems to be returning after that febrile period. The benchmark Shanghai Composite Index officially returned to bull market territory this week, having rebounded more than 20% from the year’s low in August. Overall, Chinese stocks have gained more than 10% so far this year.

“The stock market has entered a stage of self-restoration and self-adjustment and the IPOs will help invigorate the market,” the CSRC commented in a statement.

“Is it a step forward?” an internet commentator asked on Sina Finance. “Well, it took less than half a year this time.” He was referring to the last moratorium on IPOs – a much lengthier halt that lasted almost a year to December 2013 (see WiC223).

Chinese regulators are prone to worries about speculation. In periods when liquidity is pouring into the market from newly opened brokerage accounts it’s not uncommon for a new offering to be oversubscribed more than 100 times. The result is far from ideal: large amounts of money are locked up in the banking system during the IPO process, while investors typically end up with a tiny fraction of the shares they’ve subscribed for.

So last Friday the CSRC also came out with fresh rules to prevent the supply of new shares causing turbulence in the financial markets. Under the revised arrangements, investors no longer need to put their money into the listing sponsor’s accounts during bookbuilding. Instead they pay only after the allocation of new shares is confirmed.

“While withdrawal of funds before an IPO often led to sinking stock prices, the same funds returning to the market after subscriptions sent prices higher, leading to market instability,” Xinhua news agency claims.

Regulators also hope the reform will reduce speculation, boost liquidity and reduce funding costs in the financial system. Early in June, for example, when 25 IPOs took place, nearly Rmb6 trillion yuan ($944 billion) of cash was tied up in the financial system. (The amount actually raised in those IPOs only amounted to Rmb41.4 billion.)

The measures may still fall short when it comes to taming investor enthusiasm for hot new stock offerings. “We don’t need to have our money frozen when subscribing for an IPO? This is great news. This will be like a free lottery!” one investor celebrated on Xinhua’s weibo account. The new danger is that retail punters vastly inflate their orders, complicating the allocation process (and potentially defaulting if they get more shares than they bargained for).

There will be a lot of “free lotteries” coming up. Nearly 600 companies are waiting for approval to list, compared to 345 firms that went public in the 18 months prior to July’s market chaos.

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